What Is Market Capitalization? Definition and Why It’s Important

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What is Market Cap? How to Find the Value of a Company

Why is market capitalization important?

Market capitalization provides a quick measurement of the size of a company and the relative risk of investing with that company. Here are some important details about market capitalization for both investors and employees in the financial sector, such as financial advisers:

Investors

Individuals participating in the stock market will likely find researching the market capitalization of companies valuable as they decide where to put their money. Differences in market capitalization generally mean differences in the risk associated with a particular stock.

Most investors choose to diversify their portfolios by selecting stocks from large-cap, mid-cap and small-cap companies. This allows investors to take some risks, but balances that risk with steady, if low-returning, stocks.

Financial sector

Many jobs within the financial sector use market capitalization frequently, such as:

Many other occupations also might benefit from an understanding of market capitalization. Regardless of your position, understanding the risk and reward for your client is vital, in addition to being able to explain this information to them.

How to calculate market cap

To calculate a companys market capitalization, take the number of shares of stock issued by the company and multiply it by the closing price of one share.

Number of stock shares x Closing price per share = Market capitalization

Here’s an example:

Publicly traded company ERB has 10 million stocks issued. An individual stock costs $20 at the close of the market. Multiplying the issued stock number by the cost of an individual stock results in a market capitalization of $200 million. If ERBs stock prices go up to $30 a share at 10 million stocks, its market capitalization would be $300 million.

Levels of market capitalization

Traditionally, there are three levels of market capitalization: large-cap, mid-cap and small-cap. However, in recent years, mega-cap and micro-cap have been added to the top and bottom of these levels to reflect company size ranges, while nano-cap refers to “penny stocks” with the highest risk.

These levels are set based on the market capitalization value. Each level has a range, though the ranges are not standardized and may vary from one source to another.

Mega-cap

This level describes the biggest companies. Mega-cap companies generally have a market value of more than $200 billion and are often the most conservative choice for investors. A mega-cap companys large size generally means it will provide a low but consistent return on investment.

Large-cap

Large-cap describes companies with a market value of $10 billion to $200 billion. Investing in large-cap companies is often a safe choice because they are large enough to provide security and consistency for investors.

Mid-cap

Mid-cap refers to companies with a market value between $2 billion and $10 billion. Mid-cap companies offer a balance between the conservative, slow growth of mega-cap and large-cap investments, but are still relatively safe. You should research mid-cap companies and look at their financial history when choosing how much money to invest.

Small-cap

Small-cap companies have a market value between $300 million and $2 billion. These companies are generally much younger than those in higher levels. Investing in a small-cap company is risky, but the rewards can be high as the company grows and increases in overall value. This is another level that requires research before investing.

Micro-cap

Micro-cap companies generally have a market value between $50 million and $300 million and offer the same risks and rewards as small-cap companies. Often, the financial sector wont differentiate between micro-cap and small-cap and will instead include all companies at these two levels in small-cap.

Nano-cap

Market cap investment example

Market capitalization is an important term for individual investors and those who work or hope to work in the financial sector. Understanding how to appropriately value companies makes the task of managing your money—or the money of your investors—much easier.

Relying on data and research can also lead to increased earnings as an investor or financial adviser.

Example: Imagine you are a financial adviser. Think back to the earlier example about the publicly traded company ERB. The company has issued 10 million stocks, and an individual stock costs $20. Based on these numbers, the market cap for ERB is $200 million. Therefore, ERB is a micro-cap company. Investing there may give a great return, but its a risky choice.

As a financial adviser, you’ll want to research the companys financial history and stock trends to present to your client before investing.

FAQ

What is market capitalization in simple words?

Market cap—or market capitalization—refers to the total value of all a company’s shares of stock. It is calculated by multiplying the price of a stock by its total number of outstanding shares. For example, a company with 20 million shares selling at $50 a share would have a market cap of $1 billion.

What is market capitalization and why is it important?

Market cap allows investors to size up a company based on how valuable the public perceives it to be. The higher the value, the “bigger” the company. The size and value of a company can inform the level of risk you might expect when investing in its stock, as well as how much your investment might return over time.

Is market cap a good indicator?

The market capitalization of a company can give investors an indication of the size of the company and can even be used to compare the size of one company to another.

What is a good market cap for a stock?

Large-cap: Market value of $10 billion or more; generally mature, well-known companies within established industries. Midcap: Market value between $3 billion and $10 billion; typically established companies within industries experiencing or expected to experience rapid growth.

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